Tuesday, March 28, 2017

Structural Goals of Development Model and Basic Ideas/Fundamentals of New Development Model

In my previous post, I proposed a new development model to correct economic imbalances. In this post, I'll discuss the structural goals of the model alongside the basic ideas of the development model and the foundational underpinnings of the underlying economic goals of the model. This post will be split up into 7 sections:
1. Introduction
2. Energy Infrastructure
3. Immigration and Wages
4. Manufacturing and Economic Diversification
5. Taxation
6. Preventing Imbalances and Allowing for Economic Adjustments

1. Introduction:
The primary goals of this development model are:
1. a well-diversified economy
2. high wages to sustain strong internal demand
3. centrally directed investment from both public and private sources
4. an energy/infrastructure system to serve the needs of the 21st and 22nd centuries

Since ~1970-1980, the US has been running persistent trade deficits alongside a persistent trade deficit in manufactures. We've also seen rising productivity in manufacturing. So the logical consequence would imply that the US has been losing manufacturing jobs while manufacturing drops as a percentage of the economy in exchange for technology, finance, and services. Of course, this's exactly what's happened.

A well diversified economy has strong finance, non-financial services, manufacturing, trade, agriculture, and technology sectors. In order to get a fully diversified economy, a good target is ~15-20% of GDP towards manufacturing. We can also expand the portion of the export section too. In order to do this, we first need to protect development capital invested in manufacturing. The protection policies that I find appropriate for today's world are a destination-based cash flow tax (Paul Ryan's "border adjustment tax") and a tax on American assets held abroad. Not only will the protectionism help protect development capital in American manufacturing, but it'll help exporters as well. So protection would hit two birds with one stone.

In terms of infrastructure, the best way to do it is with a mix of public and private capital. Public capital will be able to supplement what private capital could not do. The infrastructure needs to be the basis for an economy that can sustain and provide a base building block for the country for the next century or more. This infrastructure will range from a core energy base to a manufacturing base to other strong sectors.

2. Energy Infrastructure:
In the case of energy infrastructure, one of the biggest problems in the 21st century is the negative impact of extractive industries that entrench rent-seekers and don't embed into ecological life-cycles. The solution for this problem is to shift to other forms of energy ranging from nuclear energy to renewables. When I speak of nuclear energy, I specifically mean the thorium reactors which're much more environmentally friendly. By renewable energy, I mean things ranging from solar energy to wind to geothermal to even biomass.

Nuclear energy investment never comes from the private sector due to its inhibitive cost. So investment into new nuclear technology, new nuclear power plants, and adaptation of existing nuclear power plants must come from the government. For new technology, the goal should be the development of thorium nuclear reactors. As time goes on, the costs of investment will fall while technology gets better. Currently, the US gets 10% of its energy consumption from nuclear energy. Getting to 25-35% nuclear energy within 15-20 years is not only within possibility, but realistically achievable--provided political idiocy doesn't get in the way (a big if).

Then, we've got investment in an infrastructure grid to deal with renewable energy. When an economy starts using renewable energy, the energy coming from solar and wind doesn't necessarily show up all at once. So an electric grid needs the ability to switch fuel sources on a dime from when the energy source turns off. Also, we'd need to adapt the federal grid so that it's possible for solar power in California or Arizona at 3-5 PM (during peak energy collection) can be sold in the East Coast at 6-9 PM (where there's peak energy demand). All of this requires a ~$1 trillion investment (>33% more than Peter Zeihan's estimate) in grid infrastructure over ~10-15 years to totally revamp the US electric grid (although a full federal grid infrastructure investment is not necessary and most of this can be financed by private capital--and already is).

In the case of renewable energy, there's many hydroelectric dams in the US that generate power, but those dams use old technology and need to be rebuilt. An infrastructure investment in those dams amounting to ~$50 billion over a decade is more than enough (more than double estimates from Stratfor) to produce ~3 times output in hydroelectric power within 15-20 years. All forms of renewable energy will triple within 15-20 years except for biomass. That should put the US at ~40-50% of energy coming from either nuclear power or renewables (as a conservative estimate, but in reality, I suspect we'd see a much faster increase in renewables than we'd expect).

Also, we've see significant improvements in issues resulting from extraction (like greenhouse emissions) as we transition from use of coal to use of natural gas. We also have new technologies that can use released carbon or methane, dissolve them into fuel, and then get another combustion cycle. This can really help reduce emissions to the point where the 40-50% from renewables or nuclear would end up becoming 60-70%.

3. Immigration and Wages:
One of the ways in which the world is moving in is in the direction of automation. Due to automation, many jobs will become automated rather quickly. We also know that wages have been stagnant for ~30-40 years. So our immigration policy must be designed to deal in a world where automation is rampant, where we need to sustain social safety nets for a society where people are living longer, and where we can increase wages.

The first step to shifting an immigration policy that makes sense is to first reduce the amount of unskilled labor immigration. In the short-term, such a policy will create labor shortages to drive up wages. In the medium to long-term, you'll see firms begin to invest more in automation, which'll only accelerate.

In order to keep the dependency ratio from getting out of whack (which either forces higher debt or higher taxes), the US will still need immigration as birth rates are unlikely to spike any time soon. What that means is immigration must be mainly focused on capitalists, the wealthy, skilled labor, and selectively chosen refugee populations. Skilled labor has capital inputs, which means that more skilled labor doesn't necessarily reduce the wages of other skilled labor--and certainly not in the same way unskilled labor can.

4. Manufacturing and Economic Diversification:
As I've said from the beginning economic diversity is valuable cuz it creates economic and financial structures robust to shocks. Diverse economies require several powerful sectors ranging from manufacturing to finance to technology to services, all are necessary in a strong economy. Our current economy is largely built on tech, finance, energy, investment, and services. What's lacking is manufacturing and investment. The goal of diversifying the economy implies that we'd want manufacturing and exports (combined) to be ~20-30% of the economy.

The investment problem can be fixed by incentivizing both private/business investment while also including some public spending. In terms of incentivizing business investment, a simple solution is a corporate tax cut to 20% in addition to a 20% destination-based cash-flow tax (DBCFT) that'd combine to function as a 20% business flat tax. In addition, there'd also be tax cuts for further business investment that'd turn the US into a gigantic tax haven for firms doing real business investment in the US. Public spending can fill in the gap to help profits of capitalists where private capital will not go (and cannot go) like nuclear power.

The DBCFT would also help manufacturing by taxing cash flow of good made abroad being sold in the US. It'd tax offshore earnings, discourage corporate inversions, and encourage firms to onshore manufacturing cuz the entire country would be turned into a massive tax haven for business investment.

Other things we need to be doing involve building modern infrastructure networks to interlink powerful city-regions across the country. What does this imply? It implies a federal high speed rail network. It implies rebuilding and redesigning the interstate highway system to keep up with current geopolitical and financial needs (mainly, this involves rebuilding and some minor expansions).

5. Taxation:
The goal of taxation (other than raising revenue) should be incentivize the accumulation of wealth and upward class mobility among the lower classes while taxing away what's destructive an economy long-term. In order to incentivize the accumulation of wealth, flexible class structures are necessary. Financial history tells us that what creates wealth is a capacity for risk, a value for work, institutional flexibility, sound incentive structures, and an avoidance of debt for most purposes. The goal of taxation should be to promote this.

So if we'd like to reduce the use of debt, we should promptly impose a tax on leverage across the financial system. If we'd like to reward work, we need a progressive tax system wherein workers are taxed less and are encouraged to save more. In order to do this, we can begin by eliminating the payroll tax and raising the standard deduction to $30,000. On top of hiking the standard deduction, the goal should be to implement a flat tax of 20-25%. The flat tax would also tax capital gains as well.

Also, I've previously called for a tax on all extraction. I stand by that, but if that's not possible, then we should go for a tax on carbon or issue securities for carbon ("cap-and-trade"). All environmental degradation should be heavily taxed or the costs on those guilty should be ruthlessly imposed by courts.

With respect to corporate taxes, I outlined what our goal is earlier. We should target a flat 20% business tax with tax cuts for business investment. That way, we'd incentivize exports by not taxing them and it'd allow for a level playing field considering most major countries are either severely protectionist (like Japan, China, and most of East Asia) or are implicitly protectionist or have a very high VAT (usually ~20% in Europe). The goal is to promote development capital, especially in manufacturing.

6. Preventing Imbalances and Allowing Economic Adjustments:
The most likely imbalances this economic model would promote is one of excess capacity, as most of the goals in this model are designed to increase capacity. The part that'd rectify these issues is high wages, which can only be sustained by large amounts of skilled labor. However, high wages will not be enough on their own for a model that promotes capacity as much as this.

Hence, another goal needs to be a strong currency. If the strength of the currency is at risk of shifting the current account balance into a very large negative, we can use protection to offset those impacts long-term. A strong currency is useful because it increases the purchasing power of consumers and helps to sustain a strong consumption base internally.

Another goal also needs to be investment in workers, in their skills, and in their education. Currently, one of the biggest problems we face is young people walking around with a massive debt overhang from going to college. So we need a new system. What I'd suggest is a system wherein the tuition is paid for by the government, but in exchange, the government would receive 7-10% of your income for the next 10-15 years of work after you leave REGARDLESS of how much the person makes. This'll help us deal with the social cost of college without making debt slaves out of our future population. It'd also free us from the idea of "free college" where people go to school to study worthless subjects like women's studies and sociology without suffering a cost. In this case, it'll create incentives wherein those who go to college to get high-paying jobs and the universities who support such structures will benefit. If they choose not to go into higher paying jobs, they'll still be able to go, but they'll be punished without becoming lifelong debt slaves.

Another goal should be to make sure there's some kind of floor for health insurance. Single-payer systems are terrible cuz they control costs by rationing care. The government caps demand in order to control costs, which makes rationing necessary since capping demand removes the flexiblity of price and of supply. In the end, health services have to be rationed. Instead, the goal should be to adapt the ACA to deal with the high premiums in the ACA exchanges. The easiest solution would be to get everyone on the exchange and let them form into a gigantic pool wherein one person can negotiate for tens of millions of people. If we did that, costs would come down and almost everyone would have a base level of health insurance.

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